Analysis: Can Philippines transform in 05?

SINGAPORE, Dec. 22 (UPI) -- Could 2005 prove the year of economic transformation for the Philippines with more fiscal and financial reforms in the offing? The country's economic team believes so, but investors are a bit more skeptical.

This year of steady economic growth, the fourth in a row, was marked by a continued recovery in exports, investments and services, while some reform measures were put in place to improve revenue collection.

As a result, the cumulative deficit to November was $2.85 billion, or 81 percent of the full-year target, so the government is likely to undershoot the official target by year end by a few billions.

Yet, revenue growth was 6.3 percent year on year in November, the slowest rate since January having declined in each of the last three months, and highlighted the need for more tax increases, economists said.

The government's $1.42 billion tax initiative, first announced in July, is still generally stuck in Congress. "Credit agencies are losing patience and a sovereign downgrade is in the offing. A two-notch downgrade cannot be ruled out either," said Mike Moran, economist at Standard Chartered.

The last minute passing of the 'sin tax' package (liquor and cigarettes) on Dec 15 by the Congress was a positive surprise, which should bring a little over $260 million a year in new revenue.

"The tax hike is expected to raise revenues by about $260 million - or about 0.25 percent of 2005 GDP. Compared to a deficit of about 4 percent of GDP this year, this isn't a major victory, but a notable step in the right direction," noted Jun Ma, economist at Deutsche Bank.

"Unfortunately, there seems to be no similar consensus on the need for most of the other seven of President Arroyo's revenue measures announced in June. We expect the deficit will fall to 3.2 percent of GDP in 2005 due to this tax hike, some improvement in revenue efficiency and higher privatization receipts," Ma said,

Indeed, the respite over the sin tax could be brief as both Congress and Senate are still fiercely opposed to the additional four more fresh revenue measure that aim to raise another $1.34 billion.

In a recent downgrade of its credit outlook on the country Fitch pointed that the Congress' reluctance to remove big-ticket items from VAT exemptions signified how big businesses interest has been jeopardizing the pace of fiscal reform.

"Strangely, it is becoming less important what measures are passed and which are not. What is more important is whether policymakers, both in the executive and legislature, have the political resolve to implement any kind of unpopular fiscal reforms at all," Moran added.

The government is trying to paint a more positive fiscal outlook for 2005. The 5.3 percent increase in fiscal spending in fiscal year 2005 proposed by Congress, which still requires Senate approval in January, is smaller than the 7.1 percent rise in expenditure in the first 10 months of this year. Meanwhile, the finance ministry plans to raise fund by accelerating power plant sales next year.

Slated for passage by early 2005 include a proposal imposing rewards and punishments on revenue collection agencies, a tax amnesty bill that requires the filing of a Statement of Asset and Liabilities for the future tracking of taxpayers, a measure rationalizing fiscal incentives for investments and a proposal to raise the VAT to 12 percent from 10 percent.

But two out of the eight tax measures originally proposed by President Arroyo are now out of the picture. The excise tax on petroleum and franchise tax on telecommunications companies are no longer under consideration. These two measures would have brought in $634 million or 0.6 percent of GDP. Instead, what is being considered is to raise the value added tax (VAT) rate on telecommunications firms to 12 percent from 10 percent, which would bring in only $178 million.

The government's economic team is fully aware of the need to further improve revenues to GDP looking ahead. The Arroyo administration has also expressed its commitment to break the culture of corruption that holds back the pace of development.

Officially, growth is expected to come a touch below 6.5 percent this year and slow down to 5.3 percent next year as the agriculture sector faces the ill effects of forecasted El Nino and the crops damaged by the recent typhoons. The economy will also be affected by the lingering high oil prices and slower global output.